In 2010 the number of buyout deals was low in the biotech area due to conservation of cash coupled with some very large drug companies finishing up their mergers. 2011 has the promises of a major acquisition year with certain companies hoarding large amounts cash, such as Merck (MRK) ($10B), Johnson and Johnson (JNJ) ($22B), GlaxoSmithKline (GSK) ($10B), and Eli Lilly (LLY) ($6B) to name a few. Here is an except from an article written by Steve Burrill, author of the Burrill report:
Mergers & Acquisitions: The predicted surge in big Pharma acquisitions of biotech companies did not happen in 2010. It will in 2011. Sanofi (SNY) will finally seal the deal and acquire Genzyme (GENZ). This will usher in several other marquee acquisitions of blue chip biotech companies.
Click to enlarge charts
So what are these companies looking for in terms of possible acquisition targets in the biotech market?
1) Companies that are in late stage clinical trials.
2) Companies with blockbuster drug potential, which is one with potential sales of $1B/year.
3) Companies with very high chances of success in the Phase III trials.
4) Companies that own all world-wide rights to their product and have long term patent protection.
I have previously written about Synergy Pharmaceuticals (SGYP.OB) who recently issued an 8K with an updated company presentation, where they provided information to the investment community that is of significant relevance. After meeting with the FDA, Synergy is accelerating their testing and going to a critical Phase II/III trial instead of a Phase IIB for their lead drug candidate Plecanatide. This drug has proven great efficacy for treating Chronic Constipation and Irritable Bowel Syndrome with Constipation (IBS-C). Some of the new information in the presentation includes estimates on the potential market size for this first drug, which is now listed at $2B/year. In terms of competition, there is no drug today that does not have the side effect of either nausea or diarrhea.
According to the data in this presentation, Plecanatide had zero serious adverse events and no reports of diarrhea in any subjects. A question that comes to mind is there an obvious reason why Plecanatide has been so well tolerated? The answer to that question is simple: Plecanatide is actually more effective than the natural GI hormone uroguanylin. This hormone is vital for proper digestion in both upper and lower GI tracts, so a more effective replacement explains why it has worked so well and also why it is tolerated. Not to mention it’s likely to continue to have a high success rate in the pivotal Phase II/III trials that are starting in early 2011. A final key point is Synergy still owns all world wide rights for their drugs, as management has purposely gone it alone to maximize future returns. Keep in mind management has vast pharmaceutical background with companies like G.D Searle, Monsanto (MON), Johnson and Johnson and GlaxoSmithKline. Patent protection goes out to at least 2023.
Trading volume remains light and has the potential to increase as investors become aware of the opportunity or possibly an investment by a large Pharmaceutical company. One indication that the merger and acquisition market is starting to heat up is Amgen’s (AMGN) recent $1B purchase of BioVex Group Inc. BioVex Group Inc is another late stage clinical development company that is working on a vaccine for certain cancers. The valuation is quite interesting given the risks with getting any type of cancer drug all the way through trials, but true blockbuster drugs end up paying off for years to come.
Disclosure: I am long SGYP.OB.